You are on page 1of 54

Mizuho Dealer’s Eye

August 2010

U.S. Dollar....................................................................1 Indonesian Rupiah .....................................................30


Euro ..............................................................................8 Philippine Peso...........................................................34
Canadian Dollar .........................................................14 Korean Won ...............................................................38
British Pound..............................................................17 New Taiwan Dollar....................................................41
Singapore Dollar ........................................................22 Hong Kong Dollar......................................................44
Thai Baht ....................................................................25 Chinese Yuan .............................................................47
Malaysian Ringgit......................................................28 Australian Dollar........................................................51

Mizuho Corporate Bank, Ltd.

Forex Division
Daisuke Karakama, Market Economist, Forex Division

U.S. Dollar – August 2010

1. Review of the Previous Month

The dollar rose in the first half of July then fell towards mid-July before trading with a lack of
incentives in the latter half of the month.
The dollar/yen pair opened the month on July 1 at the mid-88 yen level. With concerns over
Europe’s financial system smoldering away in advance of the absorption of the ECB’s 1-year
refinancing operations (442 billion euros), a subsequent worsening of U.S. economic indicators helped
push the pair down to around 87 yen level, but the pair was then bought back to the lower-88 yen level
in the wake of firm Japanese and U.S. stocks. The U.S. June employment statistics announced on July
2 showed mixed results, so the impact on the pair’s movements was limited.
On July 7, a risk-evasive mood grew on the back of reports that the Committee of European
Banking Supervisors (CEBS) had released a summary of the stress tests for European financial
institutions, and the currency pair fell to around 87 yen. On July 8, however, risk-tolerance levels
improved and moves away from the yen increased after Australia posted better-than-expected
employment data and the IMF raised its World Economic Outlook. This, together with the positive
contents of ECB President Jean-Claude Trichet’s press conference after the ECB Governing Council
meeting, led the dollar/yen pair to shoot up to the upper-88 yen level.
In the middle of the month, on July 12, the markets saw yen selling after it emerged that the
Japanese Democratic Party had lost the previous day's upper-house elections, and the currency pair
temporarily rose to 89.15 yen, its high for the month. After this, though, risk-evasive yen buying
became prevalent after a U.S. credit rating agency voiced concerns about the UK’s credit rating and
after the announcement that another U.S. credit rating institution had downgraded Portugal’s sovereign
debt. With the euro also rising against the U.S. unit, the dollar/yen pair’s topside was held down and
the pair dropped to around 88 yen. The pair then fell to the lower-87 yen level following: the
greater-than-expected fall in the U.S. June Production Price Index (PPI) (announced July 15); and the
bearish contents of the Federal Reserve Bank of New York’s July Empire State Manufacturing Survey
and the Philadelphia Fed’s Business Outlook Survey. Fears over the U.S. economic recovery grew
further following the weaker-than-expected contents of the University of Michigan Consumer
Sentiment Index for July, announced the following day (July 16). This saw the currency pair being sold
for a time to 86.27 yen, its low for July. After this, cross-yen buying increased due to purchasing by
Japanese importers and stock-price loss-trimming. This pushed the dollar/yen pair back to the mid-87
yen level. On July 21, U.S. interest rates fell further and the currency pair dropped once more to the

1
upper-86 yen level after FRB Chairman Bernanke indicated in his testimony to the U.S. Congress that
“the economic outlook will continue to be unusually uncertain” and that the Fed. was “ready to take
further action if necessary.” Thereafter, however, the pair was bought back to the lower-87 yen level
after the markets reacted favorably to bullish European stocks and better-than-expected U.S. economic
indicators.
Towards the latter half of the month, on July 24, the results of the European stress tests were
announced. Although these had been eagerly anticipated, the tests were concluded without any
problems, as had been expected, and the dollar/yen pair continued trading with a lack of incentives at
the 87 yen level. U.S. interest rates rose over July 26–27 following a series of favorable U.S. economic
indicators, and the currency pair recovered to the 88 yen level. However, risk-evasive yen buying then
gathered steam once more after the Beige Book (“Summary of Commentary on Current Economic
Conditions by Federal Reserve District,” released July 28) confirmed that the pace of economic
recovery was slowing down in some regions, and the pair was sold-back to the lower-87 yen level.

(JPY) USD/JPY
95
94
93
92
91
90
89
88
87
86
10-4 10-5 10-6 10-7

2. Outlook for This Month:

The currency pair will continue to be weighed down by bearish U.S.


business confidence

Expected Ranges Against the yen: JPY85.00–89.50

In August the dollar/yen pair is expected to continue moving bearishly. In July, bearish U.S. economic
indicators led to a further fall in U.S. interest rates, resulting in a shrinking of Japanese/U.S.
interest-rate differentials. This weighed down the currency pair, which continued to trade below the 90

2
yen level. Since the Federal Open Market Committee (FOMC) statement was released at the end of
June, it seems that Japanese/U.S. interest-rate differentials have been shrinking at a faster pace. The
speculation over the next U.S. financial policy will continue to determine the direction of the ‘policy
rate market’ in August too and the dollar/yen pair will probably continue to trade within a range around
85–90 yen. The FRB is unlikely to significantly alter its stance of “maintaining a low-interest policy
while recognizing improvements in the economic/financial situation” and at the moment it seems that
this stance will be maintained for an increasingly long time. The BOJ will probably maintain its current
policies as a matter of course, so both the U.S. and Japan will remain in a ‘zero-interest’ situation and
the currency pair will continue to trade with a lack of any clear drivers. August usually sees thin trading,
with overseas investors on summer vacation and with the Obon holidays in Japan, and in these
circumstances the currency pair is more susceptible to price fluctuations than usual. With Japanese/U.S.
interest-rate differentials prone to shrinkage, market participants should expect some downward risk
for the currency pair.
Turning to U.S. economic fundamentals, in August attention will be focused once more on the July
employment statistics (announced August 6). In June’s employment statistics, the number of people in
employment fell for the first time in 6 months due to the wearing-off of the temporary employment
effects of the U.S. government census as well as a slackening of private-sector payrolls. The jobless
rate itself improved from 9.7% to 9.5%, which is not necessarily a positive trend because this was
mainly due to the decrease in the number of people included in the unemployment count following a
fall in the labor force. Behind this fall in the labor force was an increase in the number of people who
have given up looking for work due to long-term unemployment, etc. As far as one can tell from the
various economic indicators released in July, there is unlikely to be any dramatic improvements in the
July employment figures. At the moment market forecasts are centered on job losses in the region of
100,000 compared to the previous month, the second consecutive month of negative results. The
dollar/yen pair can perhaps be expected to fall if headline figures perform below market expectations.
Turning to other economic indicators, housing-related indicators are attracting more attention than
usual, with signs of bearishness beginning to emerge. There are rumors that the markets may see new
moves by the U.S. FRB and the Obama administration in the wake of these weak results, and these
trends will have a significant impact on the dollar.
Furthermore, the most important forecast is of U.S. financial policy. As can be seen in the way the
markets focused on the statement in FRB Chairman Bernanke’s testimony to the U.S. Congress in July
that “the economic outlook will continue to be unusually uncertain,” it seems that the FRB’s “distance
from an exit” has grown substantially. The FOMC meeting will be held on August 10. If one focuses
solely on the U.S. economic indicators that have emerged between the time of the last meeting (June
22–23) and now, then it is hard to see the FOMC’s statement swinging in a hawkish direction. If
anything, the contents may perhaps become even more dovish. The Summary of Commentary on
Current Economic Conditions by Federal Reserve District (Beige Book, released on July 28) will be
the biggest factor influencing the August FOMC’s decisions. The Book reported how economic

3
activity was slackening in some regions, and following this the markets are unlikely to see the
emergence of any tightening maneuvers compared to the previous month. Market participants should
probably expect the FRB’s economic outlook to decline somewhat or, at best, to remain as it is. As for
comments by key figures in August, in addition to Federal Reserve Bank of Chicago President Charles
Evans’s speech on August 24 (Tuesday), as usual the markets will also be keeping an eye on FRB
Chairman Bernanke’s speech at the annual Jackson Hole symposium on August 27 (Friday).
Turning to Japanese factors, attention will probably be focused on the Bank of Japan (BOJ)
Monetary Policy Meeting, scheduled to be held on August 9–10. This comes directly after the launch
of a new funding system for strengthening the foundations for growth, so essentially there are unlikely
to be any new easing policies in August. In the wake of recent yen bullishness, however, the markets
are gradually starting to hear scattered statements by key figures from the government/ruling party. The
Bank of Japan may be forced into taking some kind of action or making some kind of announcement
depending on stock/currency levels at the time of the meeting. As for the BOJ’s next moves, there will
be speculation with regards to such options as 1) expanding or revising existing measures, such as
extending the loan provision period from three months to six months or 2) increasing the ceiling for
government bond purchases. There are periodic concerns that the Democratic administration may favor
option 2, but with sovereign risk currently being a major theme in the markets, there is a danger that
this will appear to weaken fiscal discipline and as such have an adverse effect. For this reason, it is
difficult to imagine option 2 being adopted. The rising uncertainty with regards to the Japanese
political situation after the ruling party’s losses in the upper-house elections will probably be seen as a
yen-selling factor by overseas investors. Japanese political trends are likely to become factors in the
currency markets over the next month or two, with the markets watching to see what kind of political
framework will be adopted to deal with the divided Diet, for example, or how the ruling Democratic
Party’s presidential elections develop.
In the short-term, market participants will continue paying attention to the behavior of speculators
(in IMM currency futures and so on) to try to gauge the direction of the dollar/yen pair. As of July 20,
net positions for the yen against the dollar were at their highest level for the year, with long positions
having accumulated to the tune of $5.84 billion. If some positive factors emerge with regards to the
U.S. economy, this would probably be conducive to a substantial and comparatively fast-paced
unwinding of positions (dollar-buying/yen-selling). If this happens then market participants should
perhaps be wary of the currency pair trading at the 90 yen level for a time in August. However, the
pair's sojourn at this price would probably be short lived.
In August the dollar/yen pair is likely to continue trading mainly below 90 yen. U.S. interest rates
have been conspicuously moving downwards since the FRB lowered their economic outlook. As of
July 29, however, Japanese/U.S. two-year interest-rate differentials have shrunk to the roughly the
same level as in November 2009, when the dollar/yen pair fell below 85 yen. These differentials and
the currency pair are strongly correlated, so the situation is unlikely to change significantly in August.
Judging solely on interest-rate differentials, in August the dollar/yen pair will either remain at current

4
levels or have its downside tested further.

5
Dealers' Market Forecast
(Note: These opinions do not necessarily agree with the other contents of this report.)
Bullish on the dollar (5 bulls: 85.00–90.50, Core: 85.50–90.00)
85.00 From the time when the euro/dollar pair’s recovery high is confirmed to the time when the euro/dollar pair starts
Kato ‒ falling, the yen will continue trading with a heavy 90-yen topside. When the euro/dollar pair does start falling
90.00 though, the dollar/yen pair's downside is likely to edge up gradually despite cross-yen selling.
At present U.S. business results are comparatively healthy, but there are rising concerns that the U.S. economy is
85.00
slowing down on a macro level. The dollar/yen pair will probably move without a sense of direction. However,
Noda ‒
there is a strong chance that stocks will rise due to seasonal factors, so the markets may see a slightly bearish yen
90.00
as risk-tolerance levels expand.
85.00 Bearish U.S. economic indicators are expected from hereon too and the dollar will also continue trading bearishly
Tsuda ‒ in the wake of fears that the U.S. economy might weaken. However, the dollar and yen both remain ‘refuge
90.00 currencies’ and the dollar/yen pair will probably trade within a range.
85.50 Dollar-selling/yen-buying movements on the back of Japanese/U.S. interest-rate differentials will be limited. Though
Takahashi ‒ market participants should be cautious of dollar selling in the wake of the deteriorating business confidence in the U.S., the
90.50 dollar/yen pair will gradually start moving firmly.
Amid rising concerns that the U.S. economic recovery is slowing down, the dollar/yen pair’s downside will
85.00
probably be tested for a time. However, the U.S. is unlikely to experience a double-dip recession and there is only
Niwata ‒
so much room that Japanese/U.S. interest-rate differentials can shrink by, so the dollar/yen pair will start moving
90.00
firmly.

Bearish on the dollar (12 bears: 82.00–90.00, Core: 85.00–88.00)


Since the Lehman shock the financial markets have been supported by expectations for a global economic
83.50
recovery on the back of rising stocks, but the real effects of the collapse of the U.S. credit bubble will be felt from
Arai ‒
hereon. The recovery of final demand (consumption) has been sluggish, leading to an increasing risk of price falls
88.50
in developed nations, so risk-evasive yen-buying needs remain deep-rooted.
The dollar/yen pair is moving firmly amid a scarcity of yen-buying factors. However, there has not been enough
82.00 momentum to push the pair over the 90 yen level and trading remains stuck below 90 yen. With U.S. economic
Zenno ‒ indicators remaining unsatisfactory, if Asian investors engage in fully-fledged yen buying then the currency pair’s
90.00 downside will probably be tested once more. The cross yen is trading firmly, but if bullish signs appear then there
remains a risk of the dollar/yen pair targeting 80 yen.
The dollar/yen pair will probably continue trading with a heavy topside. There are lingering concerns of a U.S.
economic slowdown, and, with the U.S. mid-term elections looming into view, there is speculation regarding
85.00 further financial easing, and U.S. interest rates will continue to experience downwards pressure. Under these
Tanaka
‒ circumstances, attention will be focused on U.S. economic indicators and the FOMC meeting. Also, August sees a
(Yoshihisa)
89.00 substantial redemption of U.S. treasuries, which will also act to hold down the dollar/yen pair’s topside. If any
unexpected negative factors emerge, the markets may see risk-off yen buying and attempts on the currency pair's
downside.
August is usually a month with a relatively large amount of U.S. treasury redemptions, so the markets may see
84.80 U.S. treasury-selling by Japanese investors and the situation will be conducive to yen interest-rate swaps. At the
Tate ‒ same time, it is difficult to foresee any active investment in overseas securities by Japanese investors during the
88.10 Obon holiday season. For all these reasons, the markets are likely to see downwards pressure on the dollar/yen
pair. Supply and demand are likely to hold down the pair due to a lack of any particular incentives.
85.00 The outlook for the U.S. economy was revised downwards in the Beige Book, and with the dollar/yen pair
Hasegawa ‒ continuing to be influenced by major U.S. indicators at the beginning of the month, dollar-selling sentiments look
89.00 set to continue beyond the August FOMC meeting.
Miyachi 84.00 With speculators unwinding their major-currency positions, the dollar/yen pair can be expected to move bullishly

6
‒ during the early stages of any cross yen position-adjustments. However, August is likely to see yen buying due to
89.50 seasonal factors such as the redemption of U.S. treasuries, so with risk aversion continuing to smolder away the
dollar/yen pair's topside will be limited.
84.00 U.S. interest rate hikes seem to have been pushed back into the future and there is room for a fall in long-term U.S.
Sato
‒ interest rates. There is also speculation about a shrinkage in Japanese/U.S. interest-rate differentials and the dollar
(Masahide)
88.00 will probably trade with a heavy topside.
85.00 It is difficult to discern any factors for either the yen or the dollar. Amid uncertainty about the direction of the U.S.
Otani ‒ economy, as typified by FRB Chairman Bernanke’s testimony to the U.S. Congress, and with interest-rates set to
90.00 remain low, the environment will continue to be unconducive to any active dollar buying.
85.00 U.S. interest rates fell in the wake of worsening U.S. economic indicators and the downwards revision of the
Nakayama ‒ FOMC’s economic outlook. The situation remains conducive to dollar selling and the dollar/yen pair is likely to
90.00 continue trading with a heavy topside.
At present U.S. interest rates are falling due to rising concerns over the direction of the U.S. economy. Dollar selling is
84.50
expected to continue on the back of this and the dollar/yen pair is likely to trade with a heavy topside. Furthermore,
Tasaka ‒
with U.S. treasury redemptions and the Japanese Obon holidays looming, market participants should be wary of any
89.50
sudden plunge amid thin trading.
84.50 The markets are focusing on the slowdown of the U.S.’s economic recovery, and even if stocks move firmly in the wake
Sato
‒ of the favorable business settlement results, the dollar will move bearishly. The economic outlook seems bleak, as seen in
(Tomoko)
89.00 the U.S. FOMC’s statement, though it will probably difficult for the yen to test its 2009 highs.
In FRB Chairman Bernanke’s July testimony to the U.S. Congress, he mentioned how “the economic outlook will
85.00
continue to be unusually uncertain.” This was seen as a signal that U.S. interest-rate hikes were being put off even
Yamaguchi ‒
further into the future and the dollar fell against the yen. If August also sees the release of worse-than-expected
89.00
economic indicators, then the dollar/yen pair can be expected to have its downside tested once again.
(As of July 30)

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

7
Daisuke Karakama, Market Economist, Forex Division

Euro – August 2010

1. Review of the Previous Month

July was a month of appreciation for the euro/dollar pair.


The pair started the month on July 1 at the lower-US$1.22 level. European sovereign risk concerns
then receded and the pair rose to the US$1.25 level in the wake of the favorable results of Spain’s
auction of 5-year government bonds. Towards July 6 risk-tolerance levels improved in tandem with the
firm movements of European stocks, and the currency pair strengthened to the upper-US$1.26 level.
The pair was then bought to the US$1.27 level on July 8 in the wake of: the increase in risk appetite
following the better-than-expected Australian employment data; and the favorable reception to the
positive contents of ECB President Jean-Claude Trichet’s press conference after the ECB Governing
Council meeting.
The middle of the month (July 12) saw an increase in risk-evasive dollar buying, with the
euro/dollar pair weakening to the upper-US$1.25 level. This was due to movements to lock-in profits
in advance of U.S. business settlements and the announcement of the European stress test results. On
July 13 the pair fell to the lower-US$1.25 level in the wake of the downgrading of Portugal’s sovereign
debt by a U.S. credit rating agency. Risk appetite then grew, however, and the pair was bought back to
the lower-US$1.27 level after the auction of Greek government bonds passed satisfactorily and after a
large U.S. aluminum company announced healthy results. The minutes of the U.S Federal Open
Market Committee (FOMC) meeting were released on July 14 and they reconfirmed the FRB’s bearish
economic outlook. This led to further dollar selling and the euro/dollar pair finally broke through
US$1.30. Euro selling then increased after a large U.S. credit rating company downgraded Ireland’s
sovereign debt, but the euro was then bought against the U.S. unit on July 20 due to rising optimism
with regards to the stress tests of European financial institutions. This pushed the euro/dollar pair up to
hit its temporary high for the month of US$1.3029. Risk aversion increased the following day (July 21)
in the wake of FRB Chairman Bernanke’s guarded testimony to the U.S. Congress about the future of
the U.S. economy, with the currency pair crashing to the lower-US$1.27 level as a result. After this,
however, the pair shot back up to the lower-US$1.29 level after the favorable results of major U.S.
companies were confirmed. The European stress tests (results announced on July 24) passed without
any problems, as had been expected. As a result they did not really impact the markets and the pair
continued trading stably at high prices around US$1.29.
Entering the latter half of the month, July 26 saw the announcement of better-than-expected U.S.
economic indicators. Against this backdrop, the NY Dow-Jones Average experienced substantial gains

8
and risk appetite increased, all of which saw the euro/dollar pair rising to the mid-US$1.29 level. ECB
President Jean-Claude Trichet’s positive remarks about the stress tests were also well-received,
pushing the pair up to around US$1.300. The pair then reached its monthly high of US$1.3047 on July
27 after large German and Swiss banks posted strong results. On the following day (July 28) the
slackening pace of the U.S. economic recovery was confirmed once more in the Beige Book (Summary
of Commentary on Current Economic Conditions by Federal Reserve District). This led to a bearish
Dow Jones and the euro/dollar pair continued to move around the upper-US$1.29 level.

(Euro/Yen)
In July the euro/yen pair underwent a gentle appreciation.
The pair opened the month at the upper-109 yen level. It strengthened to the lower-110 yen level on
July 1 in the wake of the favorable results of Spain’s auction of 5-year government bonds. The
Australian dollar then rose against the yen on July 8 following better-than-expected Australian
employment data, and the euro/yen pair was also dragged higher to reach the upper-112 yen level.
The middle of the month (July 12) saw the euro/yen pair lose value after the downgrading of
Portugal's sovereign debt by a U.S. credit rating agency, but the pair then recovered to the mid-112 yen
level after the markets reacted favorably to the satisfactory results of the auction of Greek government
bonds. The currency pair then strengthened to 113 yen level after the markets focused on the bullish
results of a large U.S. semiconductor company. Dollar selling increased after the U.S. economic
outlook was further revised downwards in the minutes of the U.S. FOMC meeting, announced July 14.
On top of this, on July 19 the euro/yen pair rose to the lower-113 yen level after the European unit was
given a lift by optimistic views with regards to the stress tests. The euro/yen pair then crashed to the
upper-110 yen level on July 21 following reports of FRB Chairman Bernanke’s guarded testimony to
the U.S. Congress about the future of the U.S. economy. The much-anticipated July 24 stress test
results passed safely, as expected, wiping away credit uncertainty. This saw the euro/yen pair rise to
the upper-112 yen level. The pair was bought temporarily to its monthly high of 114.74 yen over July
27–28 as some large German and Swiss banks posted strong results and after stocks rose globally.
After this though, the slackening pace of the U.S. economic recovery was confirmed once more in the
Beige Book and stocks began trading bearishly. Under these circumstances the currency pair was sold
back to the lower-113 yen level.

9
(USD) EUR/USD EUR/JPY (JPY)
1.38 132
1.36
1.34 127
1.32
1.30 122
1.28
1.26 117
1.24
1.22 112
1.20
1.18 107
10-4 10-5 10-6 10-7

2. Outlook for This Month:

Pay attention to neutralized speculator positions

Expected Ranges Against the US$: US$1.2400–1.3100


Against the yen: JPY107.00–114.50

In August market participants should be wary of the euro/dollar pair’s leeway for depreciation. The
euro beat market expectations by strengthening throughout June and July. Looking at IMM currency
futures, it seems that euro positions are gradually approaching neutral levels. There is a distinct
possibility that the euro’s bullishness was caused by the process of eliminating short positions that had
accumulated to historically high levels. Not many observers believe that we have seen a decisive end to
the turmoil in Europe that was set off by government sovereign problems. Market unease had jumped
from “liquidity concerns → solvency concerns” through to the major theme of “concerns about the
eurozone system,” but as euro short-covers accumulate there is a sense that this unease gradually
fading away. However, there were doubts about the rigor about the stress tests, and the results have
failed to eradicate uncertainty about the European financial system. On top of this, tough fiscal
reconstruction measures will undoubtedly lead to a weakening of various European economic
fundamentals and indicators. More than anything, it is difficult to imagine the ECB moving closer to an
exit strategy during this phase of fiscal tightening. One of the main reasons why the eurozone’s
problem nations have managed to dispose of their government bonds without problems is because
Europe’s private financial institutions have managed to maintain their purchasing power on the back of
liquidity provision by the ECB. If the ECB adopts some tightening measures then this will probably act

10
to pour cold water on attempts to resolve Europe's sovereign problems. In these circumstances, the
situation will continue to be fraught with downside risk for the euro.
After the examinations of the soundness of European banks (stress tests) there is now a sense that one
of Europe’s biggest issues has been laid to rest. Market concerns are currently shifting away from
Europe’s sovereign problems towards fears of a U.S. economic slowdown and it is difficult to see the
euro being swayed by any factors emanating from Europe. The euro’s rise in June and July was in the
end a result of “dollar weakness.” During this time there have also been a series of events that would
have invited market displeasure in the past, such as the downgrading of the sovereign debt of some
euro-affiliated countries and the strikes in Greece, and in actual fact there are not many factors that could
be interpreted as being favorable for the euro. This “euro strength due to enemy slip-ups” may well
continue in August and as a result the euro will also be swayed by U.S. economic indicators.
The ECB Governing Council is unlikely to diverge substantially from their financial easing policies
when they meet on August 5. August will see 3-month refinancing operations. These operations are
contributing in no small way to the successful auctions of the sovereign debt of the eurozone’s problem
nations. If we assume that this provision of liquidity by the ECB is what is stopping Europe’s sovereign
problems from worsening, then the ECB may expand or strengthen these measures, but there will
probably be no repatriation of funds for the time being. With no major policy decisions on the horizon,
market participants will be focusing on the details of ECB President Jean-Claude Trichet’s press
conference after the meeting of the ECB Governing Council. With governments refraining from any
expansionary fiscal policies, the ECB will continue to pursue easing policies in August too, so the
environment will remain conducive to a bearish euro.
It will be difficult for either the FRB or the ECB to move towards an exit (interest rate hikes) in the
short term. Regarding the “distance from an exit” of financial policy, up until the beginning of June the
ECB was clearly lagging behind the FRB, but from the end of June onwards, with the FRB’s economic
outlook being revised downwards, the gap between the two banks has shrunk somewhat. This has
probably underpinned the recent euro/dollar pair’s movements. In 2010 the pair has repeated a pattern
whereby the markets see “short covering when the euro rises, only for the euro to hit new lows when the
short covering comes to an end.” It is possible that the euro’s rise during June and July was down to the
revision of short positions that had previously accumulated (short covering). As stated at the beginning of
this report, it seems that euro positions are gradually approaching neutral levels and it is difficult to
discern any factors leading to active euro buying. In these circumstances, the possibility cannot be ruled
out of short positions accumulating once again.

11
Dealers' Market Forecast
(Note: These opinions do not necessarily agree with the other contents of this report.)
Bullish on the euro (6 bulls: 1.2600–1.3400, Core: 1.2900–1.3200)
The stress tests are over and the markets are seeing some temporary euro buying. Worrisome factors for the euro
1.2600
have in no way been totally eradicated, but with most market participants expounding euro shorts, short buying
Zenno ‒
back has probably led to a further increase in euro buying. There is no sense yet that euro shorts have been settled
1.3400
and the euro/dollar pair’s topside will be tested once more in August.
There still remains pressure on market participants to revise their overly-factored-in concerns over a double-dip
1.2800 recession and European sovereign risk. The gap between European and U.S. fundamentals became conspicuous at
Tate ‒ the end of July, as did the widening European/U.S. interest-rate differentials. It is unclear how long these trends
1.3300 will continue, but from a technical standpoint, the euro may very well experience significant gains if it looks like
breaking above US$1.3115.
1.2750 The markets have recovered some composure in the wake of the stress test results. Last month saw some euro
Otani ‒ buying as a result, but there are still doubts as to the contents of the tests and sovereign risk problems continue to
1.3250 smolder away, so the euro/dollar pair will continue to trade heavily while having its topside tested.
1.2900 Dollar selling is expected to continue due to concerns over the deterioration in the U.S. economic outlook. On the
Tsuda ‒ other hand the euro/dollar pair will continue rallying, in part due to the fund inflows into the currencies of those
1.3400 emerging/resource-rich nations that are leading the world economy.
Although concerns over Europe’s finances have not been eradicated, market participants have shifted their focus
1.2600
Sato to the U.S. In these circumstances, the situation is expected to remain relatively conducive to euro buying. There

(Tomoko) 1.3300 are no positive euro-buying factors and there may be a period of reversal, but on the whole the pair is likely to
trade firmly.
1.2800 The European stress tests have passed safely, though there have been some criticisms that the audit criteria were
Yamaguchi ‒ too lenient. Further euro buying is likely as a result of the emergence of a series of bullish European economic
1.3200 indicators. However, sovereign risk still remains, so the euro/dollar pair's topside will be limited.

Bearish on the euro (11 bears: 1.2500–1.3300, Core: 1.2800–1.3150)


Euro buying-back is likely in the near future due to the sense of relief that emerged after the European stress tests
1.2600
passed safely. In the mid-term though, the outlook for the global economy is bearish, as seen in the poor state of
Arai ‒
balance sheets, so the main trend will be for dollar and yen appreciation. Either way, the ECB will have to
1.3300
consider some further easing measures, so the markets will probably not see the euro hitting its highs.
The euro's room for appreciation is limited following the shrinking of speculative short positions after the stress
1.2700
tests were navigated safely. The current difference between business confidence in the U.S. and Europe is just a
Kato ‒
temporary phenomenon and the mid-term outlook for growth still seems more optimistic for the U.S., so the
1.3200
markets will gradually see some dollar buying.
The euro/dollar pair will probably trade in a range. The stress tests, a major market factor, have passed without
incident and market participants are now awaiting the emergence of new factors. Though there remain
1.2700
Tanaka deep-rooted causes for concern in the fiscal arena and so on, these are unlikely to become an issue in the short

(Yoshihisa) term. The markets have seen some favorable European indicators on the back of the weak euro. On top of this, the
1.3200
euro/dollar pair has been supported by dollar selling due to fears of a U.S. economic slowdown. However, there is
an undeniable sense that the pair lacks the momentum to rise above and beyond current levels.
From the beginning of the month until the FOMC meeting the markets will continue to see
1.2700
dollar-selling/euro-buying while keeping an eye on U.S. interest rate trends. However, there are no reasons for
Hasegawa ‒
active euro buying and from the latter half of the month onwards market participants will probably be looking for
1.3200
selling opportunities.
1.2600 The current bullish European economic fundamentals were probably influenced by the World Cup and the bearish
Noda
‒ euro, so the durability of this trend remains to be seen. With deep-rooted concerns remaining with regards to

12
1.3200 Europe’s finances, the markets will probably see some adjustment.
The markets have reacted favorably to the conclusion of the stress tests and the temporary calming-down of
1.2550
concerns over sovereign risk/the financial system. However, risk continues to smolder away. Furthermore, some
Miyachi ‒
observers believe that an appropriate level for the euro would be between US$1.20–1.30, so the euro's room for
1.3150
appreciation will be limited.
1.2800
Sato The main reason for the current euro appreciation against the dollar is the buying-back of euro shorts. The pair’s

(Masahide) room for appreciation will probably be limited from hereon.
1.3200
The U.S. has seen a series of weak economic indicators. At the same time, the announcement of the eurozone's
1.2600 stress test results has led to a dilution of market uncertainty and Europe has seen the announcement of
Nakayama ‒ better-than-expected economic indicators. As a result of all this, the markets have seen euro buying-back.
1.3200 However, the situation in the eurozone remains difficult, with fiscal austerity leading to economic sluggishness, so
the euro/dollar pair's topside will be limited.
1.2500 Market participants should be wary of dollar selling on the back of deteriorating business confidence in the U.S.
Takahashi ‒ economy. However, amid eurozone fiscal concerns and lingering financial uncertainty, the euro/dollar pair's
1.3250 topside will be limited. There is a risk of depreciation if the markets avoid risk assets for a time.
The markets are currently seeing some revisions to the excessive pessimism that had been factored in with regards
1.2650
to Europe. This has led to euro buying-back. Europe's sovereign problems have by no means been eradicated as a
Tasaka ‒
result of the stress tests though, so the euro will start trading bearishly once again after a round of buying back has
1.3200
finished.
1.2500 The stress tests have been completed and the various European CDS markets are gradually recovering composure.
Niwata ‒ There are also smoldering concerns regarding a U.S. economic slowdown. All this will probably see the euro’s
1.3200 highs being temporarily tested, but euro buying will probably be limited following a lull in euro short unwinding.
(As of July 30)

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

13
Katsuhiko Takahashi, Americas Treasury Department

Canadian Dollar – August 2010

1. Review of the Previous Month

At the beginning of July crude oil prices fell sharply in tandem with globally bearish stocks, leading to
an environment conducive to Canadian-dollar selling, and the Canadian unit began the month trading
at the C$1.0677 level. However, the U.S. markets went on holiday after the announcement of U.S.
employment data, so adjustive movements saw the Canadian unit break below C$1.06. Though the
subsequently-announced Canadian home-building approvals figure was significantly lower than market
expectations and Canada’s Ivey Purchasing Managers Index also posted weak results, Canadian-dollar
buying remained prevalent against a backdrop of firm U.S. stock markets, and the U.S. dollar/Canadian
dollar pair broke below C$1.04. The June Canadian employment data (announced July 9) was stronger
than expected, causing the currency pair to temporarily crash below the C$1.03 level. The number of
people in work increased by 93,200, significantly more than expected (20,000), and the unemployment
rate hit 7.9%, beating forecasts/the previous figure. Expectations for a Bank of Canada consecutive
interest-rate hike had receded but they bounced back once more with these figures. Buying pressure on
the Canadian dollar subsequently became entrenched and the currency pair fell for a time to C$1.0276,
but on the whole the pair continued to make small movements back and forth around the lower-C$1.03
level.
Mid-July saw the selling of the currencies of resource-rich nations against major currencies such as
the dollar, euro and yen. This followed a series of bearish Chinese economic indicators as well as the
revelation in the FOMC minutes that the FOMC had revised their U.S. economic outlook downwards
slightly. Canadian-dollar selling saw the U.S. dollar/Canadian dollar pair reach C$1.0580 and the
Canadian unit experienced an across-the-board depreciation. On July 20 the Bank of Canada
announced that they would be raising the policy rate by 0.25% to 0.75%, the second successive month
of rate hikes. As regards the next policy rate amendment though, in their statement they announced that
they would be making a prudent assessment of the situation while keeping a close eye on global
economic developments. The markets had seen Canadian-dollar buying in the wake of the rate-hike
announcement, but the dovish statement soon led to selling-back.
In the latter half of the month, the May retail sales figures were announced and they disappointed
market expectations by falling for the second consecutive month. On top of this, Canada’s
much-anticipated core CPI index recorded sluggish results, falling 0.1% from the previous month and
marking 1.7% y-o-y growth. These figure failed to elicit any clear response from the U.S.
dollar/Canadian dollar pair though. The results of the European financial institution stress tests were

14
announced after this. Although some observers were skeptical, a sense of relief developed in the
markets. This led to some positive movements and the risk-sensitive currencies of resource-rich nations
rose together with stock markets and commodity prices, with the Canadian dollar strengthening
temporarily to C$1.0256 against its U.S. counterpart. After this, however, crude oil prices crashed
below 76 dollars and unstable trading saw the currency pair return to C$1.0396 before ending the
month at the upper-C$1.03 level.

USD/CAD CAD/JPY
(CAD) (JPY)
1.08 97
1.07 95
1.06
93
1.05
1.04 91
1.03 89
1.02 87
1.01
85
1.00
0.99 83
0.98 81
10-4 10-5 10-6 10-7

2. Outlook for This Month:

With uncertainty growing about the future, pay attention to the results of
major economic indicators

Expected Ranges Against the US$: C$1.0100–1.0700


Against the yen: JPY81.50–88.00

At present the currency markets are shifting their focus from Europe’s problems to concerns over the
U.S./global economic slowdown. Concerns over economic downside risk increased after FRB
Chairman Ben Bernanke stated in his testimony to the U.S. Congress on July 21 that “the economic
outlook will continue to be unusually uncertain.” Under these circumstances, although the Bank of
Canada raised the policy rate for the second consecutive month, with regards to the next rate hike they
announced that they would be making a prudent assessment of the situation while keeping a close eye
on global economic developments. Furthermore, the Bank revised downwards their economic growth
forecasts for both 2010 and 2011, from 3.7% to 3.5% in the former’s case and from 3.1% to 2.9% in

15
the latter’s. Canada relies heavily on the U.S. economy, so concerns over a U.S. economic slowdown
often affect the Canadian dollar more than the U.S. dollar. As long as the economic situation remains
uncertain, the markets will swing between hope and despair depending on whether certain events or
major economic indicators surpass or fall below expectations. It will be difficult to discern any clear
trends and thus dangerous to make any premature decisions.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

16
Hidetoshi Honda, Europe Treasury Department

British Pound – August 2010

1. Review of the Previous Month

In July the pound rallied from its downturn at the end of June and started the month trading bullishly.
This downturn/rally were both dragged along by the euro’s movements, so although the UK unit fell
and then rebounded against the yen and the dollar, during the same phase it rose then fell back against
the euro. A number of factors have been suggested for the euro’s fall, such as: expectations for the
large-scale selling of Greek sovereign debt at the end of the first half of the year (the end of June) by
those investors who manage their investments mainly according to bond indices; and concerns that the
auction of Spanish sovereign debt on July 1 would not go well. However, Greek sovereign debt traded
more or less stably and the auction of Spanish government bonds actually went quite well, so the
markets saw substantial euro buying-back.
While the euro then rose steadily against the dollar and the yen, the pound traded at an impasse
without a clear sense of direction against these latter two currencies. The reason why the pound was
not dragged along by the euro’s recovery was probably because of the stagnant UK economic
indicators released around this time. The following indices were all worse than the markets had been
expecting: the June Services PMI (announced July 5); the HBoS June house price index (July 8); the
May manufacturing and industrial production figures (July 8); and the May trade balance (July 9, the
balance fell substantially more into the red than expected). When each of these figures was released,
the pound traded bearishly across-the-board against all the major currencies.
At the same time the euro was boosted further by the July 7 announcement by the Committee of
European Banking Supervisors (CEBS) with regards to the details of the bank stress tests, such as the
number of target banks (91) and the date when the results would be announced (July 23). Though the
CEBS failed to specify any concrete auditing criteria, the markets saw euro buying, perhaps because of
the alleviation of some uncertainty and the spreading sense of relief with regards to the European
financial system. Stocks rose across-the-board during this phase, led by financial stocks, and the
markets also saw rising crude oil prices. Then yen also traded bearishly during this period of growing
appetite for risk.
The Bank of England’s (BoE) Monetary Policy Committee meeting was held on July 8. At the
meeting the base rate was kept at 0.50% and the ceiling for the total amount for the asset purchase
program (quantitative easing) was kept at GBP200 billion. The both conformed to market expectations,
and the reason why the pound subsequently began trading bearishly across-the-board for a time is
perhaps because the decision frustrated the expectations for monetary tightening held by some sections

17
of the market.
From July 13 onwards, however, the pound began rising once again against the dollar in particular,
reaching an around 11-week high of US$1.5473 on July 15. This appreciation was probably due to the
combined effects of the following: buying factors on the pound’s side such as the bullish UK June CPI
figures (announced July 13), interpreted as “possibly accelerating the schedule for UK interest-rate
hikes”; and selling factors on the dollar’s side, such as the apparently bearish contents of the minutes to
the Federal Open Market Committee’s (FOMC) June meeting (announced July 14), such as the
reference to deflation risk, leading to the fall of U.S. long-term interest rates. There also appeared to be
significant technical factors behind this trend, such as the fact that the New York Mercantile
Exchange’s U.S. dollar index had breached the 61.8% retracement for the period from its low in April
to its high in June.
From July 20 onwards the pound began selling intermittently once again in the wake of the
announcements of the UK June fiscal balance (July 20) and the minutes of the July BoE Monetary
Policy Committee meeting (July 21). The markets reacted unfavorably after: the fiscal deficit expanded
more than expected; the minutes made it clear that the only committee member to vote for an
interest-rate hike was Andrew Sentence. However, the pound’s bearishness during this phase was
significantly influenced by the euro’s depreciation, and the UK unit actually traded firmly against the
euro. On July 20 the unsatisfactory results of the auction of short-term Hungarian bonds were seen as a
selling factor for the euro.
The euro continued trading bearishly thereafter, but the pound began appreciating across-the-board
against the major currencies from July 22. There were several factors behind this phase too, but as for
factors on the pound’s side, the UK unit’s rally was propelled by the clearly better-than-expected
results of such UK economic indices as the June retail sales figures (announced July 22) and the
preliminary GDP figures for the period April–June (announced July 23). FRB Chairman Ben
Bernanke’s testimony to the U.S. Congress on July 21 was read as being bearish with regards to the
direction of the U.S. economy and dovish with regards to financial policy. This was seen as a dollar
selling factor, with also contributed to the dollar’s overall bearishness.

18
(USD) USD/GBP GBP/JPY (JPY)
1.57 151
1.55
146
1.53
1.51 141
1.49
1.47 136

1.45
131
1.43
1.41 126
10-4 10-5 10-6 10-7

2. Outlook for This Month:

Revisions to the UK’s GDP and the BoE’s quarterly inflation report

Expected Ranges Against the US$: US$1.5100–1.5900


Against the yen: JPY131.00–141.00

In August the pound may very well strengthen further against the yen and the dollar due to technical
factors. However, it will probably trade flatly on the whole against the euro with limited room for
appreciation, so if it seems that euro appreciation against the dollar and yen is floundering, this might
also weigh down the pound’s topside. The first technical point attracting attention will be the 136 yen
level against the Japanese unit. The pound’s topside has met resistance at this level three times since
June. If the UK unit clearly breaches/takes root at this level then further pound appreciation can be
expected. At the same time, if it seems that the euro/yen pair is going to break through the 113 yen level
to reach 114 yen, this could be the impetus for across-the-board yen depreciation. Regarding the
pound’s movements against the dollar, market participants have been focusing on the trend channel that
formed from mid-May onwards. Even if the currency pair remains within the boundaries of this channel,
the pound can be expected to rise from US$1.57 level to US$1.63 level against its U.S. counterpart.
However, it seems that the pound will continue to trading leadenly at the GBP0.82 level against the
euro. After the bankruptcy of the large U.S. investment bank in September 2008, the turning point for
the pound’s dramatic crash was when it breached GBP0.82 against the euro in November 2008. The

19
pound temporarily broke back through this level at the end of June, but this rally ended with
reconfirmation of heaviness of the pound’s topside at this level.
Apart from technical factors, though there may be some revisions with regards to the various events
that became factors last month, the markets may enter a summer dead season lacking any decisive
factors. “Events that became factors last month” include the EU’s bank stress tests, for example, as well
as the expectations for financial easing by the U.S. Federal Reserve and the accompanying fall in
long-term interest rates. These factors could have been interpreted in several ways, depending on
market sentiments: the stress tests were read as a factor pushing the euro upwards, despite the details of
the tests not being thoroughly verified; and, despite the near-identical contents of the FOMC statement,
the FOMC minutes and the FRB chairman’s testimony to congress, the fall in long-term interest rates
was seen as encouraging yen appreciation once more on the back of the relatively limited room for
interest-rate falls and rising risk aversion. Many market participants will be taking summer vacations
and liquidity can be expected to fall from hereon. Considering the aforementioned price movements, the
markets will probably see some adjustments even if no particular new factors emerge, and market
participants may lose even more motivation.
As for factors on the UK’s side, attention will be focused on the revised GDP figures for April–June,
scheduled to be announced on August 27. The preliminary figures released on July 23 were
substantially better than the markets had been expecting, the main reason for this being the strong
growth in the construction sector, which saw a 6.6% rise in output compared to the previous quarter and
contributed 0.4% to GDP growth. However, this large-scale growth in construction-industry output was
assumed to be down to the significant impact of the amendment to the yardsticks used as reference
points when estimating the provisional GDP. So far there have been no calculations as to the extent of
this impact. There is a distinct possibility that the revised GDP figures will be substantially amended
and, in light of the extreme nature of the industry’s output growth, this amendment is likely to be in a
downwards direction. The rise in GDP led to pound buying when the provisional figures were
announced last month, so if these figures are significantly revised downwards, this will probably push
the pound lower too. However, it is possible that the financial markets are already factoring in a
downwards revision to some extent before the revised figures are announced on August 27, so
depending on the circumstances, the markets may actually see some pound buying if the figures are
only revised slightly downwards.
Another UK factor attracting attention is the BoE quarterly inflation report, scheduled for release on
August 11. In relation to the BoE, the markets are focusing on how the Monetary Policy Committee’s
(MPC) Andrew Sentence voted for a 0.25% rise in the base rate in both June and July. However, just
because one member voted for an interest-rate hike, this will not necessarily lead to rising speculation
that the BoE will be strengthening their monetary tightening stance or that the time for rate hikes is
drawing nearer. The voting results or the minutes do not reveal much with regards to how many people
in the MPC as a whole share Sentence’s inflationary concerns. The most precise way to gauge this
speculation about the MPC will be to look at the quarterly inflation report itself. By studying the

20
growth/price forecasts, it might be possible to assess whether the MPC vote was a simple 8–1 split or
whether those 8 people who voted against a rise also had growing concerns with regards to inflation.
The April–June CPI figures on a simple average basis rose more than 3.4% y-o-y, slightly high
compared to the forecast in the last inflation report (May). It will first of all be important to see whether
the BoE interprets this as just a temporary rise or as showing upwards pressure on prices in the
mid-term.
Other noticeable economic indices include the U.S. July employment data (announced August 6)
and the U.S. Federal Open Market Committee (FOMC) meeting (August 10). However, even if the
Federal Reserve is bearish about the U.S. economy, the markets have already factored in the possibility
of further financial easing measures, so as long as no surprisingly bullish statement or figures emerge, a
period of sluggish trading during the summer dead season will probably be unavoidable. UK indices
scheduled for release in August include: the results of the BoE Monetary Policy Committee meeting
(August 5); the June manufacturing and industrial production figures (August 6); the June trade balance
(August 10); the July employment figures (August 11); the July CPI data (August 17); the minutes of
the August BoE Monetary Policy Committee meeting (August 18); the July retail sales figures (August
19); and the July fiscal balance (August 19). Besides the aforementioned revised GDP figures and BoE
inflation report, market participants should pay attention to the fiscal balance this month. The coalition
government of Conservatives and Liberal Democrats, launched on May 11, announced a quick
succession of fiscal austerity/consolidation measures, such as the plan to slash GBP 6.25 billion’s worth
of “waste” (announced May 24) and the emergency budget (revised budget, announced June 22). July
was the first month for this series of measures to be fully implemented, so these results may well attract
more attention than they usually do.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

21
Noriko Suzuki, Singapore Treasury Department

Singapore Dollar – August 2010

1. Review of the Previous Month

July saw a bullish Singapore dollar on the back of the euro rally and the strong Singapore economy.
From the beginning to the middle of the month the markets saw a one-sided Singapore dollar
appreciation, supported by stock markets rallying worldwide and the sharp rebound of the euro (one of
the Singapore dollar’s basket currencies), which reached the US$1.30 level by mid-July after starting
the month at around US$1.22. The euro’s rally was to a large extent self-propelled after the markets
had sufficiently discounted the euro selling that had taken place over a two-month period due to
negative European factors. This rally was also connected to a revival of risk preference, with stock
markets and emerging markets also rebounding across-the-board. Under these circumstances the
Singapore dollar rose to the mid-S$1.37 level by July 13 after starting the month at S$1.40 level.
The much-anticipated Singapore April–June preliminary GDP figures were announced on July 14.
Although there was already expectation for strong growth, the figures actually exceeded these
expectations to record growth of 19.3% y-o-y, a 26.0% rise from the previous period. Moreover, the
GDP figures for January–March were also revised significantly upwards from the preliminary figures
to record growth of 16.9% y-o-y and 45.9% q-o-q. This led the government to revise their growth
forecast for 2010 from 7–9% to 13–15%. However, although the markets saw Singapore dollar buying
directly after this announcement, its rise was stalled at around S$1.37 due to strong concerns over
intervention.
Risk appetite waned a little in the latter half of the month due to growing concerns over a global
economic slowdown, led by the U.S. July 15 saw the announcement of China’s April–June GDP
figures, and although these recorded high growth of 10% level, this was less than had been expected,
leading to concerns of a Chinese economic slowdown. With the U.S. also posting a series of bearish
economic indicators, concerns over an economic slowdown grew stronger after the minutes of the June
FOMC meeting (released July 14) and FRB Chairman Ben Bernanke’s testimony to the U.S. Congress
(July 21) both suggested a cautious outlook towards the U.S. economy. Risk preference changed to
uncertainty and as a result the Singapore dollar continued trading at in impasse at the S$1.37 level for
the time being.
The Singapore unit began rising once more towards the end of the month, shooting up to the
upper-S$1.35 level on July 26, its highest point since July 2008. This followed news that a Japanese
company would be investing in a large Singapore drinks firm. Thereafter, the Singapore unit continued
to trade firmly around S$1.36, supported by further euro appreciation and bullish stocks.

22
(SGD) USD/SGD SGD/JPY (JPY)
1.43 70.0
1.42 69.0
1.41 68.0
1.40 67.0
1.39 66.0
1.38 65.0
1.37 64.0
1.36 63.0
1.35 62.0
10-4 10-5 10-6 10-7

2. Outlook for This Month:

The Singapore dollar will trade firmly on the back of the strong
Singapore economy

Expected Ranges Against the US$: S$1.3450–1.3800


Against the yen: JPY62.60–64.30

In August the Singapore dollar will probably trade firmly on the back of the strong growth of the
Singapore economy and a recovery of risk preference.
The April–June GDP figures announced in July recorded higher-than-expected growth of 26.0% on
a quarter-on-quarter annualized basis, and the Singapore economy’s recovery since the latter-half of
2009 has been remarkable. If Singapore attains 13–15% growth for 2010, as forecast by the
government, the self-propelled appreciatory pressure on the Singapore dollar will surely continue.
However, amid rising concerns over an economic slowdown in the U.S. and Europe, there is some
uncertainty as to whether the Singapore economy will be able to maintain its current rate of expansion.
These preliminary GDP figures did not include the results from June, so attention will be focused on
the final figures, which will include June, as well as the next announcement regarding export data. If
the effects of the European and U.S. economic slowdown are manifested in these statistics, this will
pour cold water on anticipation for a Singapore dollar rise. In particular, if exports to Europe
(Singapore’s biggest export destination) decline, this will have a significant impact on the Singapore
unit’s price against the euro, a price that has already risen by around 15% compared to the beginning
of 2010. Market participants will also be paying attention to export trends to China. China has replaced

23
the U.S. as Singapore’s second-largest export market and firm exports to China have contributed to
Singapore’s economic recovery. RMB flexibility has meant more room to appreciate against the dollar
and if exports to China remain healthy, this will be a factor shoring up the Singapore dollar.
Investor risk appetite seems to be undergoing an across-the-board revival, which will support the
firmness of the Singapore unit and other Asian currencies.
Factors to watch out for in August include: the prime minister’s speech on National Day (August
9); the FOMC meeting on August 10 (for gauging the direction of the U.S. economy); the June retail
sales figures (August 13); the July export statistics (August 17); the July CPI data (August 23); and the
final GDP figures for April–June (scheduled for around August 24–27).

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

24
Shinsuke Mitsuishi, Singapore Treasury Department

Thai Baht – August 2010

1. Review of the Previous Month

The dollar/baht pair opened July at around Bt32.42. The markets saw baht selling towards July 7 in the
wake of rising risk aversion, sparked off by the deterioration of U.S. economic indicators. This pushed
the currency up to around Bt32.48. The baht was then bought back following European and U.S. stock
market rallies and a bullish Thai SET stock-price index. Sudden baht appreciation towards July 12
pushed the currency pair to around Bt32.32. With the Bank of Thailand’s (BoT) Monetary Policy
Meeting looming on July 14, baht buying was supported by hints that an interest rate hike was
imminent such as: comments on July 12 by the Thai finance minister Korn Chatikavanij to the effect
that the BoT will probably raise interest rates within the week; and deputy governor Dr. Bandid
Nijathaworn’s comment that an interest rate hike would be on the agenda during the week’s Monetary
Policy Committee (MPC)meeting. At the much-anticipated July 14 meeting, the BoT announced
they would be hiking the policy rate by 25bp to 1.50%, as most observers had expected. The contents
of the accompanying statement were quite hawkish. The statement gave a bullish outlook for the
current Thai economy, while Prasarn Trairatvorakul, the next BoT governor, said that the policy rate
would probably be raised to 2.00% within the year. In the wake of this meeting the baht appreciated
further against the dollar to rise to around Bt32.20. The markets then saw some adjustment to dollar
selling/baht buying and the currency pair breached Bt32.30 on July 21. This was due to rising risk
aversion following the bearish movements of European and U.S. stock markets. The pair then fell,
however, due to: confirmation in the June trade balance (released by the Thai Ministry of Commerce
on July 21) that Thailand was still maintaining a healthy surplus of US$2.32 billion; and the upwards
revision of the BoT’s forecast for 2010 GDP growth to 6.5–7.5%. On July 23 the results of the stress
tests of European financial institutions were announced. Only 7 out of 91 institutions failed the test,
with all the major financial institutions passing, as was more or less expected. This led to risk appetite
sentiments and the baht opened the week on July 26 by rising against the dollar to around Bt32.20.

25
USD/THB THB/JPY
(THB) (JPY)
32.7 2.98

32.6 2.93
2.88
32.5
2.83
32.4
2.78
32.3
2.73
32.2
2.68
32.1 2.63
32.0 2.58
10-4 10-5 10-6 10-7

2. Outlook for This Month:

The baht will continue trading firmly due to rising expectations for an
interest-rate hike and a healthy trade surplus

Expected Ranges Against the US$: BT31.40–32.60


Against the yen: JPY2.60–2.85

In August the markets will see dollar selling/baht buying. The statement released after last month’s
BoT Monetary Policy Committee meeting struck a bullish tone with regards to the Thai economy,
indicating that the tourist industry was showing signs of recovery and recognizing that the impact of
recent political turmoil was limited. Prasarn Trairatvorakul, the next BoT governor, said that the policy
rate would probably be raised to 2.00% within the year, and with only 3 more MPC meetings
remaining this year, there are rising expectations for a further rate hike at the next meeting on August
25. Also, the BoT raised their 2010 GDP forecast from 4.5–5.8% to 6.5–7.5%, vividly demonstrating
the growing strength of Thailand's domestic economy. After dropping into the red in May, Thailand’s
balance of trade returned to a healthy surplus last month, and all of these factors will probably lead the
Thai currency to trade firmly against the dollar. Risk aversion grew sharply for a time last month
following the sudden deterioration of a series of U.S. economic indicators and FRB Chairman Ben
Bernanke’s statement that “the U.S. economic outlook will continue to be unusually uncertain.”
Market participants should continue to pay attention this month to: the movements of major-country
economic indicators (such as the U.S. and Europe); statements by important figures; and any increase
in risk aversion as a result of these indicators/statements.

26
This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

27
Norihumi Yoshida, Singapore Treasury Department

Malaysian Ringgit – August 2010

1. Review of the Previous Month

In July the dollar/ringgit pair traded within its established range around MYR3.20.
At the beginning of the month, concerns grew that the U.S. economic recovery was slowing down
after a series of worse-than-expected U.S. indicators, such as the employment statistics and the ISM
Manufacturing Index. This led to ringgit selling and the pair fell to around MYR3.19 after starting the
month at the MYR3.25 level.
On July 8 the Malaysian central bank raised the key policy rate for the third time in succession,
from 2.50% to 2.75%, and the bank predicted that the Malaysian economy would continue expanding
on the back of strong private consumption and private/public investment. The markets were somewhat
surprised by the rate hike and the dollar/ringgit pair fell temporarily to the MYR3.18 level. Once the
pair breached the MYR 3.20 level though, fears of intervention grew and on the following day the pair
rebounded, so in the end the impact of the rate hike was limited.
Towards the end of the month, uncertainty over the direction of the U.S. economy grew even more
pronounced following weak U.S. economic indicators and FRB Chairman Ben Bernanke’s statement
that “the economic forecast will continue to be unusually uncertain.” On the other hand, Europe
continued to see bullish economic indicators, while the financial-institution stress tests were also
concluded without any problems, so the euro moved firmly against the dollar. As risk aversion
diminished, Asian currencies began moving somewhat firmly and the ringgit also broke through
MYR3.20 to trade between MYR3.18 and MYR3.19 against the dollar.

USD/MYR MYR/JPY
(MYR) (JPY)
3.42 30.5

3.37 29.5

28.5
3.32
27.5
3.27
26.5
3.22 25.5

3.17 24.5
10-4 10-5 10-6 10-7

28
2. Outlook for This Month:

The ringgit’s firmness will be confirmed on the back of receding risk


aversion

Expected Ranges Against the US$: MYR3.1700–3.2500


Against the yen: JPY26.800–27.700

In August the ringgit will move firmly on the back of healthy fundamentals and diminishing risk
aversion.
The Malaysian economy remains bullish, as stated in the aforementioned central bank statement,
and steady growth is expected to continue in tandem with growing domestic demand. In July stocks
rose to their highest level in two months and moved firmly thereafter. These healthy fundamentals
look set to continue into August, and amid growing uncertainty about the direction of the U.S.
economy, the ringgit will continue to feel appreciatory pressure against the dollar.
On the other hand, the much-anticipated European financial-institution stress tests passed by safely,
as most observers had expected. The markets are also seeing a lull with regards to concerns over the
direction of the eurozone economy, and if recent risk-evasive movements ease off, there will be
substantial ringgit buying on the back of the healthy fundamentals.
In July the bullish ringgit was pulled along by the RMB’s revaluation, but this appreciation did not
continue despite the surprise hiking of interest rates for the third time in succession, and the Malaysian
unit met resistance at its six-month high. With the latest rate hike, there is a sense that factors on the
Malaysian side have run their course. With expectations declining for a further rate hike within the
year, the markets will probably see some profit taking at the ringgit’s high levels. The ringgit will trade
firmly on the whole with a firm downside.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

29
Masahiro Gao, PT. Bank Mizuho Indonesia

Indonesian Rupiah – August 2010

1. Review of the Previous Month

The U.S. dollar/Indonesian rupiah exchange rate in July was at a standstill, trading within a narrow
monthly range of less than 100 points as of the end of July 23, but saw a slight appreciation of the
Indonesian rupiah in the fifth week. The exchange rate is below IDR 9000 to the U.S. dollar.
The U.S. dollar/Indonesian rupiah pair opened at the IDR 9085–95 level on July 1. The pair
momentarily approached the IDR 9105 level with rupiah-selling being slightly more dominant than
buying due to risk aversion, as the June PMI of China was worse than expected. However, the U.S. dollar
did not surge because of U.S. dollar-selling triggered by the U.S. lowering of the long-term interest rate.
Thereafter, the U.S. dollar began to be sold against currencies, such as the euro, on July 1 local time
because of the worse-than-expected economic indices of the U.S., such as the number of new
applications for unemployment insurance and the June ISM Manufacturing Index, as well as the May
existing home sales. Subsequently, the exchange rate temporarily approached the IDR 9030–35 level on
July 2. The pair closed the first week of trading by slightly rebounding to the upper IDR 9000 level. The
June inflation rate was announced on July 1, which was +0.97% from the previous month and +5.05%
YOY, providing evidence of the acceleration of the rise from the May result (+0.29%/+4.16%). The
YOY result reached the 4% level in May for the first time this year, but the figure rose further to the 5%
level in June.
The U.S. dollar/Indonesian rupiah pair opened the second week of trading with persistent concerns
over the double-bottom of the U.S. economy. This is due to the U.S. June employment statistics that were
announced on the previous weekend local time, showing the worse-than-expected result of growth in the
private sector payrolls, even though the unemployment rate was 9.5%, which dropped below the
predicted rate, and the decrease in non-farm payrolls was smaller than expected. The exchange rate
approached the IDR 9100 level once again on July 6, due to risk adverse sentiment in the market.
Nevertheless, the pair went back to the lower IDR 9000 level during July 7–9 because of the overall
risk-taking trend in the market, after failing to hit the IDR 9100 level, possibly affected by media reports
on China’s additional purchase of Japanese government bonds. The risk-taking trend was supported by
the spread of optimistic outlook on the stress tests for European financial institutions and the Australian
June employment statistics, which were much better than expected. The central bank of Indonesia
decided at its regular meeting on July 5 to maintain its policy interest rate of 6.50%, marking the 11th
consecutive month with the same rate. In the statement, the central bank called for caution over the
increasing inflation rate, while indicating that the April–June actual GDP growth rate had reached around
6% YOY, and this year’s annual growth rate was also expected to be near the upper limit of the estimate

30
of 5.5–6%.
The price movements of the U.S. dollar/Indonesian rupiah pair came to a standstill in the third and
fourth week of trading, hovering around at the mid-IDR 9000 level without a strong sense of direction.
The overall market sentiment fluctuated between risk-taking and risk-averting, waiting for the
announcement of the results of the stress tests in Europe scheduled for July 23 local time. Major
risk-taking factors include the better-than-expected earnings results of major American companies,
Greece’s government bond auction that showed a desirable result, economic statistics of the euro zone
(the July PMI of the euro zone, the July Consumer Confidence Index of the euro zone, and the July IFO
Business Climate Index of Germany all showed better than the estimated figures), and the appreciation of
European stock prices. Major risk-averting factors included concerns over the sovereign debt rating (not
only over the downgrading of British sovereign debt, but also over the downgrading of Ireland and
revision of Hungary’s rating in anticipation of its downgrading), the U.S. and China’s economic indices
(the U.S. saw weak results for June retail sales, the July New York Manufacturing Index, and the July
Philadelphia Federal Index, and China saw a downturn of the April–June GDP, the June CPI, PPI, retail
sales, and industrial production), bearish expressions in the U.S. FOMC minutes (the forecast of the U.S.
GDP to be released by the FRB was also revised downwards), and the statement of FRB Chairman Ben
Bernanke at the FOMC meeting (indicating that economic outlook was “unusually uncertain”). These
factors all contributed to the lack of clear direction in the market of major currencies, causing the euro to
fluctuate with the manifestation of each of these factors.
However, the risk adverse sentiment faded in the fifth week of trading replaced by a sentiment of relief,
caused by the results of the stress tests in Europe (although some point out the assessment method and
foreseen scenarios are too optimistic), which showed that the level of failure and the amount of capital
deficiency were both less than expected. On the other hand, the U.S. saw a strengthening of U.S.
dollar-selling due to concerns over the economic downturn triggered by the U.S. Beige Book, indicating
a slowdown of the U.S. economic recovery, leading to rupiah-buying in the U.S. dollar/Indonesian rupiah
market. The pair opened below IDR 9000 to the U.S. dollar on July 30 and traded at the IDR 8950–70
level.

31
USD/IDR IDR/JPY
(IDR) (JPY)
9400 1.06
9350 1.04
9300 1.02
9250
1.00
9200
0.98
9150
0.96
9100
9050 0.94
9000 0.92
8950 0.90
10-4 10-5 10-6 10-7

2. Outlook for this Month:

Pressure for rupiah appreciation due to the asset inflow is likely to be


inevitable, while volatility is expected to be stable at a low level.

Expected Ranges Against the US$: IDR 8700–9150


Against the yen: IDR 97.00–106.00

The U.S. dollar/Indonesian rupiah exchange rate in August is expected to trade narrowly, but the rupiah
is more likely to appreciate.
Among the six-item policy package announced by the central bank in June, the new requirement to
hold Bank Indonesia Certificates (SBI) for a minimum period of one month has been in effect since July.
In announcing the policy package, the central bank once again indicated its expectation to lower the
volatility of the foreign exchange market. Although it is not clear how much the enactment of the policy
has contributed to lower volatility in the U.S. dollar/Indonesian rupiah exchange rate, the current
volatility is on a level to satisfy the central bank (however, it should be noted that the exchange rate has
been on the IDR 8900 level since the opening of July 30). Ramadan is scheduled to start in August, and
the central bank is not likely to welcome an unnecessary rise in the volatility of the rupiah in such a
restless time, instead waiting for large festivals after the end of Ramadan. The overall U.S.
dollar/Indonesian rupiah exchange rate is therefore expected to remain stable with a low level of
volatility in August. However, as is symbolized by the appreciation in the Jakarta Composit Index, cash
inflow from abroad to Indonesia is likely to continue, given the comparison between the speed of

32
economic growth (including future expectations) of developed countries with various concerns and that
of Indonesia. Although a bubble economy is to be avoided, pressure for rupiah-buying is likely to mount,
along with stock price appreciation. Additionally, the U.S. dollar is likely to remain a difficult option (the
yen can be a better option) for risk aversion for the time being because of the previous month’s statement
by FRB Chairman Ben Bernanke and the U.S. Beige Book, in addition to the recent weak U.S. economic
indices. Even though the U.S. dollar/Indonesian rupiah pair is not likely to see a dramatic rupiah
appreciation down through the IDR 9000, 8900, and 8800 level one after another, it is possible for the
pair to slowly lower the downside of the U.S. dollar.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

33
Taichi Kubota, Manila Branch

Philippine Peso – August 2010

1. Review of the Previous Month

Foreign Exchange
The Philippine peso started trading by falling to PHP 46.65 against the U.S. dollar, due to the drop in
Philippine stock prices. However, this level is in the lowest range of the peso this year, and the pair came
back to the PHP 46.50 level to the U.S. dollar once the euro/U.S. dollar exchange rate rose to the USD
1.23 level. Once the U.S. dollar started moving bearishly against major currencies, such as at the USD
1.25 level against the euro on Friday, July 2, the peso was bought against the U.S. dollar, touching the
PHP 46.30 level, but it did not last, and the peso closed weekly at PHP 46.52 to the U.S. dollar.
The Philippine peso opened the second week of trading at PHP 46.55 against the U.S. dollar on
Monday, July 5. The pair came to a standstill after going up to the PHP 46.40 level, as peso-buying
dominated the market with the Philippine stock index trading at a high level around 3,300 points.
Thereafter, peso-buying gained momentum to reach the monthly high of PHP 46.15 to the U.S. dollar on
Friday July 9, as the Philippine stock index went up further to 3,400 points, which was its highest level in
about two and half years. The peso closed weekly at PHP 46.20 to the U.S. dollar.
The Philippine peso traded narrowly at around PHP 46.20 to the U.S. dollar on Monday, July 12, the
first day of the third week, as there were no economic indices announced. Thereafter peso-selling became
slightly more dominant to bring the peso down to the PHP 46.45 level to the U.S. dollar once risk
adverse sentiment increased in the market, reacting to the downgrading of Portugal’s credit rating.
However, the peso rebounded to the PHP 46.25 level as the risk adverse sentiment in the market
decreased, thanks to the smooth issuance of Greek government short-term bonds, ending the week at
PHP 46.275 to the U.S. dollar.
The peso opened the fourth week of trading at PHP 46.41 to the U.S. dollar on Monday, July 21, and
was weakened with decreased high-risk assets-buying because of the speculation that the U.S. low
interest rate would last for a long term, which raised bond prices and lowered stock prices. Nevertheless,
peso-selling/buying found equilibrium at this level, and the peso continued to trade narrowly at around
PHP 46.40 to the U.S. dollar, while maintaining the volume of trading. Peso-selling became dominant
once the deterioration in the fiscal balance of the Philippines for June was announced on Wednesday,
July 21, leading the peso to reach PHP 46.50 to the U.S. dollar. Risk aversion continued thereafter, and
the peso went down to PHP 46.65 to the U.S. dollar, but the weak peso triggered the market to buy back
the peso, which brought the peso back to PHP 46.30–35 to the U.S. dollar, waiting for the stress test
results for European banks.
The peso opened the last week of trading of the month at PHP 46.26 to the U.S. dollar on Monday,

34
July 26, with increased euro buybacks after the announcement of the stress test results. Thereafter, the
peso hovered at the PHP 46.25–30 level as of July 26.

(PHP) USD/PHP PHP/JPY (JPY)


47.5 2.15

47.0 2.10

46.5 2.05

46.0 2.00

45.5 1.95

45.0 1.90

44.5 1.85

44.0 1.80
10-4 10-5 10-6 10-7

Interest Rates
The Philippine Department of Finance’s bill auction on Monday, July 12 saw 91-day bills increase by
three basis points from the previous auction (June 28) to 3.96%, while 182-day bills increased by three
basis points to 4.19% and 364-day bills decreased by three basis points to 4.59%. The central bank
decided to maintain the annual interest rate at 4.0% at a policy meeting on the interest rate held on July
15, leaving the country’s interest rate unchanged for a year since July last year. One-month and
three-month peso interest rate swap rates hovered at around 4.10–4.25% throughout the month.

Stocks
The Philippine stock price index appreciated slowly after being traded at around 3,300 points at the
beginning of July, reaching the 3,400-point level during the first 10 days of the month, for the first time
in two and half years. In the middle of the month, the index rose further to the upper 3,400-point level
at one point, after continuously trading at the lower 3,400 level. Thereafter, the index dropped sharply
from the upper 3,400-point level, once the risk adverse moves of investors became evident with
mounting speculation that U.S. economic recovery would be slow. The index was trading at the lower
3,400-point level as of July 23.

July announcements on key economic indicators are as follows.

1) According to a July 6 announcement by the National Statistics Office, the Philippine consumer
price index (CPI) for June 2010 was up 3.9% YOY, marking a decline of 0.4 points over the May

35
rate of 4.3%. Hereafter the CPI is expected to generally remain around 4%, as it is difficult to
expect further decrease in lighting and heating expenses before the end of this year, although they
have been in constant decline. The core CPI, which excludes food and energy prices, for June,
was 3.7%, 0.1% down from the May rate of 3.8%.
2) According to a central bank announcement of July 7, foreign exchange reserves as of the end of
June 2010 amounted to USD 48.43 billion, which is the all-time high. The figure was up USD
0.74 billion on the May-end figure of USD 47.69 billion (adjusted).
3) Single-month foreign currency remittances from overseas Filipino workers (OFW) for May were
USD 1.578 billion, according to a central bank announcement of July 15, up 6.5% YOY.
Cumulative remittances from January to May 2010 reached USD 7.438 billion, up 6.6% YOY.
4) The balance of international payments of June announced by the central bank of the Philippines
on July 19 was a surplus of USD 502 million, and the cumulative balance of payment since
January has been a surplus of USD 3.235 billion. Furthermore, the annual balance of international
payments was a surplus of around USD 5.3 billion last year. The comparison with last year’s
figure shows that this year’s balance of international payments has been strengthening.

2. Outlook for this Month:

The Philippine peso exchange rate is expected to maintain a firm downside


against the U.S. dollar at the PHP 46 level, and trade volume is expected to
increase at the PHP 45 level.

Expected Ranges Against the US$: PHP 45.25–46.65


Against the yen: JPY 1.82–1.95

The U.S. dollar/Philippine peso exchange rate in August is expected to see peso appreciation compared
to July, maintaining a firm downside at the PHP 46 level and seeking the upside at the PHP 45 level. The
focus of market participants has now shifted from European sovereign debt risk, which has already been
revealed with the announcement of stress test results for European banks, to on the outlook for the U.S.
low interest rate to continue due to the economic statistics that lack short-term momentum. Under such
circumstances, the U.S. dollar is likely to be sold, while the currencies of Asian emerging countries with
high interest rates are likely to be bought.
The U.S. dollar index dropped, approaching 82 after reaching the peak of 88.7 on June 7, and it is
possible for the index to further drop toward 80 if the U.S. economic indices remain bearish from August
onward. For example, from June 7 to the latter half of July, the euro/dollar pair went up from the USD

36
1.18 level to near USD 1.30, and the dollar/yen pair went down from the JPY 92 level to the JPY 86 level.
On the other hand, the dollar/peso pair generally remained at the PHP 46 level except for the temporary
drop to the mid-PHP 45 level in the latter half of June. Yet, if there is further buying of high-risk assets
(including commodities and currencies with high interest rates), it is possible for the pair to settle at the
PHP 45 level to the U.S. dollar.
Given that the U.S. dollar/peso pair did not see the peso weaker than PHP 46.80 for a long period even
when the peso value dropped sharply after May, it is seen as unlikely that the peso will go back to a level
weaker than the upper-PHP 46 level to the U.S. dollar for the time being. This is due to the general trend
of the economic recovery of the Philippines and to the demand for peso-buying because of the inflow of
investment assets from abroad at the time of the sharp drop of the peso (resulting in an increased
attractiveness of Philippine government bonds with high yields).
With regard to the recovery of Philippine economic indices, the policy interest rate has been
maintained because of the current inflation rate below 4%, which is close to the lower limit of this year’s
target zone of 3.5–5.5% set by the central bank as its inflation target. Furthermore, steady Philippine
economic recovery is evidenced by bill amounts of exports and imports increased by around 40% YOY,
and the OFW is also at its historically highest level. From the above factors, it is possible to expect the
value of the peso to rise, reversing the trend, toward the end of this year.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

37
Hyunbae Kim, Heekyoung Jung, Seoul Branch

Korean Won – August 2010

1. Review of the Previous Month

The U.S. dollar/won exchange rate in July opened at the KRW 1230 level, and went down to the lower
KRW 1200 level thereafter due to Korean GDP growth, which was revised upwards, and the policy
interest rate hike. In the latter half of the month, the pair saw only limited fluctuation.
The U.S. dollar/won pair started trading at KRW 1233, with the won weaker (and the dollar
strengthened) by KRW 10.8 than at the end of the previous month, while there were concerns over the
economic downturn of the U.S. and China. However, the euro/U.S. dollar pair went up sharply from the
USD 1.22 level to the USD 1.25 level, reflecting the positive results of the Spanish government bond
auction, and the U.S. dollar/yuan pair renewed the lowest rate, leading the won to temporarily fall to the
mid-KRW 1210 level. The re-emerging concerns over the delay in the U.S. and Chinese economic
recoveries caused the rebound, and the won continued to trade more or less narrowly at around KRW
1220. The IMF revised Korea’s GDP growth rate upwards (from 4.5–5.75%) on July 7, and the
April–June earnings results of major Korean electronics companies were steady, which increased
won-buying. Meanwhile, the Korean central bank raised its policy interest rate (from 2–2.25%) at the
Monetary Policy Committee, for the first time in 17 months, leading the pair to drop further to below
KRW 1200, reaching KRW 1195. Toward the middle of the month, however, the pair recovered to the
KRW 1200 level, due to the increase in dollar-buying, alongside import settlement and caution over U.S.
dollar-buying intervention by financial authorities, which caused a rebound to approach KRW 1220.
Thereafter, the pair saw increasingly heavy upsides, reflecting satisfactory figures in U.S. earnings
announcements for the April–June period, announced later in the month, and smooth operation of the
European government bond auctions, as well as the increase in dollar-selling mainly by Korean heavy
industrial firms. The pair is trading again at the KRW 1200 level.
Although the yen/won pair opened trading at the KRW 13.8 level at the beginning of the month, it
momentarily went beyond KRW 14.0, reflecting the mounting concern over the downturn of the world
economy caused by a worse-than-expected China manufacturing index. However, the U.S. dollar/won
exchange rate dropped sharply thereafter, as Korea’s GDP growth rate was revised upwards and the
policy interest rate was raised. Reflecting this, the yen/won pair also dropped sharply to the KRW 13.4
level. The pair traded within a range around KRW 13.6 for a while before temporarily rallying to the
KRW 14.0 level from the middle of the month, influenced by the U.S. dollar/yen exchange rate reaching
below JPY 86 for the first time in two months, caused by the deterioration of U.S. economic indices.
Thereafter, the yen/won pair continued to trade with KRW 14.0 as its resistance line.

38
(KRW) USD/KRW KRW/JPY (JPY)
1260 8.6
1240 8.4
1220 8.2
1200 8.0
1180 7.8
1160 7.6
1140 7.4
1120 7.2
1100 7.0
10-4 10-5 10-6 10-7

Note: The graph of the KRW/JPY pair indicates the yen against 100 won, the reciprocal of the rate
mentioned in the text.

2. Outlook for this Month:

While sensitive trading is likely to continue, it is important to keep an eye


on breaks of the trading range.

Expected Ranges Against the US$: KRW 1,160–1,240


Against the yen: JPY 7.04–7.75 (100 won)
KRW 12.90–14.20

It is difficult to grasp the future climate of the U.S. dollar/won exchange rate, which continues to trade
sensitively within a limited daily range of around KRW 10, mainly at the lower KRW 1200 level. The
pair is currently dominated by opposition between the import settlement at the KRW 1200 level, as well
as the concerns over dollar-buying intervention by monetary authorities and dollar-selling by exporters at
the KRW 1220 level. Therefore, there are no particular domestic factors influencing the exchange rate,
and the pair is expected to fluctuate reflecting the results of the economic indices of foreign markets,
such as the U.S. The double-bottom concerns are expected to fade if the market recognises the possibility
of an additional interest rate hike in August, given the policy interest rate hike of the previous month
(from 2.0–2.25%) by the Korean central bank at the Monetary Policy Committee. The healthy level

39
maintained by the latest Korean economic indices and the rise in the short-term interest rates are expected
to put downward pressure on the U.S. dollar/won exchange rate. However, for the won to appreciate, the
sense of uncertainty surrounding the world economy needs to be swept away. The downside of the
exchange rate is likely to be limited for the time being. If concerns over the downturn of the European
and the U.S. economies grow, dollar-buying is expected to gain momentum once again, which is also
worth noting. There is also a possibility for dollar-buying to increase, reflecting cross-border trading
against the yen/won, as well as short-covering in the offshore markets as a result of euro and yen
appreciation.
Although the fluctuation in the yen/won exchange rate is expected to be more limited than the U.S.
dollar/won pair, it is expected to approach KRW 13.70, given the possibility of further appreciation of
the yen. The upside limit is expected to be KRW 14.00.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

40
Tomoyuki Imamura, Taipei Branch

New Taiwan Dollar – August 2010

1. Review of the Previous Month

The U.S. dollar/NT dollar exchange rate continued moving up and down at the lower TWD 32 level in
July.
The U.S. dollar/NT dollar pair opened at TWD 32.278 in July. At the beginning of the month, the
overall stock market in Asia fell due to the announcement of the worse-than-expected Chinese
manufacturing PMI, leading U.S. dollar-buying to dominate Asian currencies with mounting risk adverse
sentiment. However, the U.S. dollar/NT dollar pair faced U.S. dollar-selling pressure by exporters at
around TWD 32.30, and the rise in the exchange rate was limited. The pair hovered at the TWD 32.20
level thereafter. In the middle of the month, the value of risk assets went up, including the U.S. NY Dow
Jones Average, which recovered to USD 10,000, supported by a more optimistic outlook on the earnings
results of U.S. firms. Following this trend, the U.S. dollar/NT dollar pair also saw strengthened NT
dollar-buying pressure, but the downside fluctuated up and down due to mounting concerns over U.S.
dollar-buying intervention at around TWD 32.00 by the Taiwanese central bank. Subsequently, the
overseas market was dominated by U.S. dollar-selling because of the poor results of U.S. economic
indices, leading to re-emerging concerns over double-bottoms causing the lowering of the U.S. interest
rate. The overall market saw a weakening of the U.S. dollar, as was observed in the dollar index that
marked its lowest level in two months, but its influence on the U.S. dollar/NT dollar exchange rate was
limited, and the pair continued to hover at the lower TWD 32 level. In the latter half of the month, the
results of the stress tests on European banks were announced, which were within the predicted range,
resulting in euro- and stock-buying with a sense of relief in the overseas market. However, this had little
influence on the U.S. dollar/NT dollar pair, which is trading at the lower TWD 32 level with a lack of
direction.
The NT dollar/yen pair saw a small drop in the exchange rate in July.
The NT dollar/yen exchange rate in July opened at around JPY 2.75 to the NT dollar. At the beginning
of the month, the NT dollar/yen went down to approach JPY 2.70 to the NT dollar, with a yen-buying
trend to avert risks, reflecting the worse-than-expected results of the Chinese manufacturing PMI.
Thereafter, the pair hovered at the lower JPY 2.70 level to the NT dollar for a while. In the middle of the
month, the speculation over the U.S. earnings results being strong led the U.S. dollar/yen pair to recover
to the JPY 89 level, which also brought the NT dollar/yen near JPY 2.78. However, the U.S. economic
indices showed results that were worse than expected, and the FRB revised its economic outlook
downwards, bringing the U.S. interest rate down and a trend of dollar-selling and yen-buying to the U.S.

41
dollar/yen market. Yen-buying increased accordingly to the NT dollar, and the exchange rate dipped
below JPY 2.70. In the latter half of the month, the results of stress tests for European banks were
announced, leading yen-buying to increase in the U.S. dollar/yen pair. Meanwhile, the NT dollar/yen pair
recovered accordingly to JPY 2.70.

(TWD) USD/TWD TWD/JPY (JPY)


32.6 3.05

32.4 3.00
2.95
32.2
2.90
32.0
2.85
31.8
2.80
31.6
2.75
31.4 2.70
31.2 2.65
10-4 10-5 10-6 10-7

2. Outlook for this Month:

The U.S. dollar/NT dollar pair is expected to fluctuate up and down.

Expected Ranges Against the US$: NT$ 31.70–32.40


Against the yen: JPY 2.68–2.78

In the overseas market, there were persistent concerns over the double-bottom of the U.S. economy along
with European financial problems.
The U.S. double-bottom concerns are based on the weak U.S. economic indices followed by the
lowered interest rate, which became a factor for the overall trend of dollar-selling, leading the dollar
index to register its lowest level in about two months. Additionally, the minutes of the June FOMC
meeting indicated that the economic outlook for 2010 was revised downwards by about 0.2%, and FRB
Chairman Ben Bernanke stated at the meeting that the economic outlook was unusually uncertain,
mentioning that he was ready to take additional action, implying a possibility of additional monetary
stimulus.
Concerning the European financial problems, the results of the stress tests of European banks were
announced on July 23. The result showed that seven out of 91 banks failed the test, with a capital
shortfall of EUR 3.5 billion, which was not as bad as was foreseen, encouraging risk asset-buying paired

42
with a sense of relief. However, there was persistent criticism that the assessment conditions were too
easy.
On the other hand, economic fundamentals in Taiwan remained steady, although there was a slight
slowdown. The June export orders reached USD 34.221 billion, up 22.48% YOY, marking the ninth
consecutive month of growth. In total, 15.54% of Taiwan’s export orders come from China (including
Hong Kong), demonstrating that exports continue to grow steadily thanks to orders from China.
Furthermore, the June unemployment rate was 5.20% (seasonally adjusted), down from 5.22% in the
previous month, marking the 10th consecutive month of decrease since last August, in addition to
industrial production, which registered 24.33% YOY.
Under such circumstances, the U.S. dollar/NT dollar pair continued to trade at the lower TWD 32 level
without a strong sense of direction. There is also mounting concern over the U.S. dollar-buying
intervention by the Taiwanese central bank at times where the exchange rate drops down approaching
TWD 32.00 to the U.S. dollar, and there is a strong incentive for U.S. dollar-selling by exporters when
the exchange rate rises approaching TWD 32.30, which causes the pair to trade generally within the
range of TWD 32.00–32.30 to the U.S. dollar. Factors such as the steady economic fundamentals of
Taiwan and the U.S. economic indices, as well as the lowering of interest rates, have not generated a
sense of direction in the U.S. dollar/NT dollar market, which is trading in a narrow band.
It is difficult to find new factors influencing this market, and if there is no major change in the ECB or
FOMC during the first half of the month, or in the issues related to China—Taiwan’s largest export
destination—the U.S. dollar/NT dollar market is expected to fluctuate up and down in August, seeking
new influential factors.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

43
Teruhiko Yamada, Tomoko Sato, Hong Kong Treasury Department

Hong Kong Dollar – August 2010

1. Review of the Previous Month

The Hong Kong dollar spot rate in July saw appreciation of the Hong Kong dollar after a
large-scale IPO, leading to Hong Kong dollar-buying.
The Hong Kong dollar spot rate in July saw a bearish trend going down to the HKD 7.7970 level to the
U.S. dollar at the beginning of the month, due to the sagging Hong Kong stock market, reflecting the
sharp drop of the Chinese stock market and overall cash outflow, seemingly a repatriation to Mainland
China. However, toward the middle of the month, the exchange rate rose sharply to temporarily reach the
HKD 7.7630 level, with Hong Kong dollar-buying encouraged by the large IPO of a major Chinese
state-owned bank, a rally of the Hong Kong stock market, and the depreciation of the U.S. dollar.
Thereafter, there was a mixture of Hong Kong dollar-selling, reflecting the IPO proceeds repatriation to
Mainland China, along with Hong Kong dollar-buying, reflecting cash inflow to the Hong Kong stock
market. The U.S. dollar/Hong Kong dollar pair closed trading at the HKD 7.7688 level on Friday, July 23,
local time (HKD 7.7788 at the end of June).

(HKD) USD/HKD HKD/JPY (JPY)


7.810 12.4

7.800 12.2

12.0
7.790
11.8
7.780
11.6
7.770
11.4
7.760 11.2

7.750 11.0
10-4 10-5 10-6 10-7

Hong Kong dollar interest rates in July dropped slowly after the end of the rise, which started in
May.
The Hong Kong dollar short-term interest rate in July dropped slowly with an end to the rise that started
at the end of May. This was due to the weakening of fundraising capacity before the large-scale IPO by a

44
major Chinese state-owned bank, as well as the lowered U.S. short-term interest rate. Trading closed on
Friday, July 23, local time, with the overnight interest rate at 0.01/0.05% (versus 0.01/0.05% at the end of
June), the three-month interest rate at 0.29/0.39% (versus 0.33/0.43%), and the one-year interest rate at
0.75/0.85% (versus 0.85/0.95%).

The Hong Kong stock Market in July went up along with Chinese and worldwide stock
appreciation, after fluctuating narrowly while observing the situations of the U.S. and China.
The benchmark Hang Seng Index in July went down below 20,000 points at the beginning of the month,
temporarily reaching 19,777.83 points, with the stock market facing a trend of stock-selling to secure
financing for new shares, waiting for a large IPO by a major Chinese state-owned bank, and further
affected by the sharp drop of the Chinese stock market. Thereafter, the stock market was globally
stabilized, including the Chinese stock market, with the weakened risk adverse sentiment in the entire
stock market, leading the Hang Seng Index to rally and rise momentarily to 20,722.22 points toward the
middle of the month. The rising momentum, however, did not last, and the index took a downturn, due to
concerns over a slowdown of the U.S. economic recovery and of Chinese economic growth. Nevertheless,
the index rose again substantially toward the end of the month, along with the Chinese stock market
staying steady and global rallying in the stock market. Trading closed on Friday, July 23 at 20,815.33
(versus 20,819.08 at the end of June).

2. Outlook for this Month:

The Hong Kong dollar spot rate is expected to see both buying and selling
factors, causing a lack of direction.

Expected Ranges Against the US$: HK$ 7.7550–7.7850


Against the yen: JPY 10.50–12.00

The Hong Kong dollar spot market is likely to be bullish, with the Hong Kong stock market
holding steady.
The Hong Kong dollar spot market in August is expected to be slightly bearish, losing the main factor for
large-lot Hong Kong dollar-buying after a large IPO by a major Chinese state-owned bank. However,
toward the end of July, the Hang Seng Index started to rise from 20,000 points, approaching 21,000
points, reflecting the steadiness of the Chinese stock market, which encouraged expectation for the Hong
Kong stock to stay steady in August. It is therefore expected that Hong Kong dollar-buying will be
strengthened in August. The recent state of the Hong Kong stock market has a strong correlation with
Chinese monetary authorities and the Chinese stock market, rather than with issues in the U.S. and U.S.
stock prices, so it is important to keep an eye on issues in China. With regard to the U.S. dollar market,

45
which directly influences the Hong Kong dollar spot market, the FRB chairman stated in July that the
economic outlook is still unusually uncertain, indicating that a slowdown of the U.S. economic recovery
that accelerated U.S. dollar-selling last month was not likely to dramatically improve in August.
Therefore, there is little possibility for the Hong Kong dollar to depreciate due to sharp rallying of the
U.S. dollar. The flexible foreign exchange policy of the Chinese yuan announced in July is also expected
to herald a new bearish factor for the Hong Kong dollar, with mounting motivation to secure the Chinese
yuan through the Hong Kong dollar. However, this is not likely to be a decisive factor influencing the
Hong Kong dollar spot rate for the time being, as the plan to use the Hong Kong dollar as an offshore
center of the Chinese yuan is still in the initial stage.

Hong Kong dollar short-term interest rates are expected to seek a settling point in the downturn
trend.
Hong Kong dollar short-term interest rates in August are expected to seek a settling point, while a
downturn trend continues. While concern over the U.S. double-bottom persists, U.S. government bonds
continue to attract investment as a risk-free asset. Furthermore, the FRB chairman stated in July at an
FOMC meeting that the economic outlook continued to be extraordinarily unclear, and he was ready for
additional policies depending on necessity. The U.S. short-term interest rate, which had continued to rise
since March this year because of the strengthened U.S. dollar fund-raising capacity, also dropped slowly
in July. Furthermore, the liquidity problem in the Mainland China short-term financing market, which
was accelerating fund procurement by certain Chinese companies in Hong Kong, has seen a temporary
pause. Moreover, cash inflow into Hong Kong from abroad is likely to increase, due to the persistent
expectation of the Chinese yuan to appreciate, as well as the enlargement of yuan business based on the
new agreement concluded in July. The abundant liquidity of the Hong Kong dollar in Hong Kong is
therefore likely to be maintained, and the Hong Kong short-term interest rate market in August is
expected to continue falling. However, it is difficult to expect the Hong Kong short-term interest rate to
fall to the level of a low interest rate, which continued from the latter half of last year to April this year,
given the facts that the lowering interest rate saw a temporary pause in the latter half of July, that the fund
inflow based on the expectation for the yuan business to enlarge will be eventually converted into
Chinese yuan, and that there is a cash demand for the large IPO in which the total amount of fund
procurement for the second half of the year is provisionally calculated at about HKD 370 billion (about
JPY 4.23 trillion). The Hong Kong short-term interest rate is therefore likely to stabilize at a low level
above that of the previous low interest rate period.
This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

46
Miho Yamamoto, MHCB (China) Treasury Division

Chinese Yuan – August 2010

1. Review of the Previous Month

Stance of the authorities:


Prime Minister Wen Jiabao
Prime Minister Wen Jiabao warned at a symposium held in Changsha on July 3 that China's current
economy remained favorable, but that the domestic and international environment was extremely
complicated.
Prime Minister Wen also expressed his stance to maintain stable economic policy for the
July–December period this year. He also stressed once again the government objective to strike a balance
between rapid economic growth, economic restructuring, and inflation. Furthermore, China reconfirmed
its commitment to proactive financial policies and moderately loose monetary policies.

2. Impact of the Major Indices on the Market

Announcement Indices Reaction in the market

July 10 Foreign Trade Statistics The impact after the announcement


was limited, but concern over the
Total Exports: 43.9% (YOY) downturn of the Chinese economic
growth strengthened.
Total Imports: 34.1% (YOY)
July 11 Money Supply: +18.5% (YOY) The yuan appreciated before the
announcement with speculation that
the authorities would accept a
certain level of yuan appreciation
out of concern over excess liquidity.
July 15 GDP Growth The U.S. dollar/yuan spot rate saw a
(2010 second quarter) small reactionary fall, due to
speculation over a slowdown of
CPI: +2.9% (YOY) economic growth and a downturn of
the Chinese economy, based on the
PPI: +6.4% (YOY) announced results of the April–June
GDP and June Industrial
Production, which were worse than
Industrial Production: +13.7% (YOY)
expected.

Yuan spot market


Range in July: High CNY 6.7884 Low CNY 6.7676 (as of July 26)

47
3. Dates and Factors regarding U.S. Dollar/Yuan Market Fluctuation:

July 1–5: Based on the comment made by Prime Minister Wen, the Chinese yuan market once saw
depreciation of the yuan. The U.S. dollar/yuan pair opened at CNY 6.7744 to the U.S.
dollar, down 33 points from the close of the previous week. Thereafter, leading market
participants triggered dominant yuan-buying, and the pair quickly reached CNY 6.7676,
the highest level since yuan revaluation.
July 6–7: The Development Research Center of the State Council announced that China was still likely
to accomplish 9.5% growth this year, immediately after which yuan-buying dominated
temporarily the U.S. dollar. However, reacting to the yuan price marked on July 5, which
was the highest after yuan revaluation, the yuan started to depreciate once again. The
weekly low of CNY 6.7812 was marked against the U.S. dollar.
July 8–12: At the beginning, the pair traded narrowly without seeing any events, at around the People’s
Bank of China (PBOC) middle rate. However, the yuan started to appreciate once again due
to speculation that the money supply, which was scheduled to be announced on July 11,
would further increase.
July 13–15: Waiting for the announcement of important indices of July 15, the pair saw once again a
trend of yuan depreciation, due to speculation that the results of GDP growth and industrial
production figures would indicate a slowdown of Chinese growth.
July 16–26: The pair came to a standstill after the announcement of important indices, as the market
did not expect any further impact on the market. Toward the end of the month, PBOC
Deputy Governor Hu Xiaolian commented that China’s international balance of trade was
gradually coming into good form and that there was no basis for large fluctuations in the
market for the time being, which limited appreciation of the yuan. On the other hand, the
U.S. employment statistics saw a decline in employment once again, and there was
increasing pressure from the U.S. on the yuan to appreciate against other currencies, leading
the yuan to register a monthly low of CNY 6.7884 to the U.S. dollar on July 22. However,
the exchange rate did not go up much above the CNY 6.78 level, and trading continued
without a sense of direction.

48
(CNY) USD/CNY CNY/JPY (JPY)
6.840 14.0
6.830 13.8
6.820
13.6
6.810
13.4
6.800
13.2
6.790
13.0
6.780
6.770 12.8

6.760 12.6
10-4 10-5 10-6 10-7

4. Outlook for this Month:

Japan is to relax visa requirements for Chinese tourists.

Expected Ranges Against the US$: CNY 6.7400–6.7800


Against the yen: CNY 12.50–13.00

Factors for yuan depreciation


The major economic indices announced in July were worse than expected, indicating a downturn in
Chinese economic growth, which led the market prone to yuan depreciation. The People’s Bank of China
admitted on July 21 that the Chinese yuan was not ready for large fluctuation, and the Monetary Policy
Committee of the People's Bank of China expressed its willingness to accept depreciation of the yuan on
July 22 to support China’s export business, when necessary, if the yuan further appreciates.

Factors for yuan appreciation


The results of the U.S. employment statistics were worse than expected, and on July 21, FRB Chairman
Ben Bernanke criticized the Chinese reformed exchange rate policy for being advantageous to China’s
export business, while admitting that revaluation of the yuan was the right decision in order to protect
China’s benefits. Looking at the November election ahead, criticism over yuan revaluation in the U.S. is
expected to further increase in coming months.

Topics

49
Visa requirements for Chinese tourists have been significantly relaxed since July 1, enlarging the number
of Chinese households eligible for tourist visas to 16 million, which is about 10 times more than it used
to be. Department stores, which have been struggling over the decline of domestic consumption, have
begun their efforts to attract Chinese tourists. In the Tokyo metropolitan area, department stores began a
service to provide free translation, shopping guides, and delivery of products to hotels, which is
scheduled to spread to the Osaka area. While downturn of domestic consumption is causing a sales
decline, department stores are strengthening their services for Chinese tourists, many of whom are
affluent consumers and willing to purchase expensive products with a high profit margin. Yuan
appreciation brought by the new yuan exchange rate policy is seen as a favorable factor for them,
strengthening the expectation for special demand.

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

50
Masaharu Yano, Sydney Branch

Australian Dollar – August 2010

1. Review of the Previous Month

The Australian dollar/U.S. dollar pair held steady in July. The Australian dollar saw a bearish trend at the
end of June, due to mounting uncertainty over fiscal and financial problems in the euro zone, as was seen
in Spain’s credit rating, which was downgraded by an American rating company by two notches.
However, the July exchange rate opened at around USD 0.84 to the Australian dollar. The pair saw an
end of the fall reflecting the basic agreement between the newly established Gillard government and a
major mining company on the amended bill concerning the Resource Super Profits Tax. Subsequently,
the pair went up to approach USD 0.86 to the Australian dollar, as an optimistic outlook on the domestic
and overseas economy was indicated in the statement at the regular meeting of the Reserve Bank of
Australia (RBA) on July 6. The pair went up further over a short period to approach USD 0.88 to the
Australian dollar, reflecting the favorable earnings estimate of the U.S. financial institutions, as well as
the healthy results of domestic employment statistics. Thus, the Australian dollar recovered from its
bearish trend from the previous month. Portugal’s downgrading by an American rating company was
announced on July 13, which led the market to face re-emerging uncertainty over the fiscal problems in
the euro zone. However, a Greek short-term government bond auction took place on the same day
without any difficulty, and the U.S. companies had satisfactory earnings results, which allowed the pair
to trade steadily at around USD 0.88 to the Australian dollar. Economic indices of China, which has a
strong trade relationship with Australia, was announced on July 15, but there was only limited impact on
the Australian dollar market, as the figures indicated a lowered inflation rate and a steady trend of
economic recovery.
In the latter half of the month, the pair traded at a slightly higher level. The minutes of the July regular
meeting of the RBA, which were disclosed on July 20, revealed that the April–June inflation rate would
be a decisive factor for the financial policy discussed at the August regular meeting, which accelerated
Australian dollar-buying by certain investors aiming at interest rate differentials to be generated by the
August interest rate hike. As a result, the Australian dollar rallied. Furthermore, the satisfactory
performance of U.S. company earnings and improvement of the economic indices in the euro zone
further contributed to a recovery of risk tolerance among investors, leading the Australian dollar, a
currency with a high interest rate, to go up to USD 0.89 with a firm support line. On July 23, the
much-awaited results of the stress tests of financial institutions in the euro zone were disclosed. It was
expected that 10 to 20 out of 91 banks would fail the test, but the result was not as bad as anticipated,
with only seven banks failing the test. On the other hand, however, some expressed doubt over the

51
harshness of the test criteria, showing two different views on the test results, which caused both selling
and buying of the Australian dollar, resulting in a lack of direction. The second quarter Consumer Price
Index, which was seen important for the next policy interest rate decision, was announced on July 28.
However, the result was below the estimate, and the key inflation rate was down to +2.7% (versus +3.1%
in the previous data) coming back to the RBA target range, an annual rate of 2–3%. These results
accelerated an unwinding by those who foresaw an interest rate hike, leading the exchange rate to fall
close to USD 0.89 to the Australian dollar.

(USD) AUD/USD AUD/JPY (JPY)


0.95 90
0.93 88
0.91 86
0.89 84
0.87
82
0.85
80
0.83
0.81 78
0.79 76
0.77 74
0.75 72
10-4 10-5 10-6 10-7

2. Outlook for this Month:

While European financial problems persist, the Australian dollar market is


expected to seek direction.

Expected Ranges Against the US$: US$ 0.8800–0.9200


Against the yen: JPY 75.00–80.00

The Australian dollar/U.S. dollar exchange rate in August is expected to seek direction. July saw
strong results from domestic business indicators and improvement in the earnings results of the U.S.
companies, as well as business indicators in the euro zone, leading the exchange rate to hold steady with
these domestic and overseas factors. With regard to August, the focus is expected to be on the outcome of
the RBA regular meeting, which is scheduled for August 3. It was considered that the interest rate rise
phase of the “exit strategy”, which continued from last October, took a temporary pause this May, and
that previous hikes in policy interest rates would bring the key inflation rate, which is Australia’s

52
inflation target, down to the target range (an annual rate of 2–3%). However, the market was increasingly
reflecting the next interest rate hike, at the August regular meeting at the earliest, due to the minutes of
the July RBA regular meeting, which revealed a discussion pointing to the upside risk of the key inflation
rate. The key inflation rate, which attracted much attention, however, dropped down to 2.7% YOY in the
RBA's target range (an annual rate of 2–3%). The financial policy is therefore expected to be maintained
at the August regular meeting. Furthermore, the RBA financial quarterly report, which will be announced
on August 6, is also noteworthy. The economic growth rate and key inflation rate outlook will be revised,
which will possibly take the shape of a downward revision—given the speculation over the decline in
resource demand in China, which has a strong trade relationship with Australia—and cause the fading of
the excessive expectations over the Chinese economic climate. If there is a downward revision, the
Australian dollar is expected to trade with heavy topside. In addition, an election is scheduled in
Australia on August 21. Additionally, in June, a new government under the Australia's first female Prime
Minister Julia Gillard was established, along with the falling approval rating of then-Prime Minister
Kevin Rudd. The new government is showing speedy policy management, as was seen in the early
agreement with a major mining company over the pending problem of the Resource Super Profits Tax.
Although some point out that the difference in the approval ratings of the ruling party and the opposition
party was narrowing, most view that the current party will retain power without any difficulty and that
the “political risk” will be avoided. A risk scenario would continue to take into consideration fiscal and
financial problems in the euro zone. The much-awaited results of the stress tests relieved the market, but
a sense of uncertainty persists due to the harshness of the assessment and the handling of the sovereign
debts purported to be held to maturity. Under such circumstances, it is difficult to expect proactive
buying of the Australian dollar, leaving the possibility that the exchange rate would fall due to the
unwinding of long positions on the Australian dollar that are being re-established by speculators. The
Australian dollar/U.S. dollar exchange rate is expected to continue trading with a lack of direction in
August.
Other domestic factors to focus on in August include retail sales figures (August 3), the regular
meeting of the RBA (August 3), the RBA quarterly financial report (August 6), and employment
statistics (August 12).

This report was prepared based on economic data as of July 28, 2010.
This report is intended only to provide information and does not constitute an inducement to engage in any particular investment. This report
is based on information believed to be reliable, but Mizuho Corporate Bank, Ltd. (MHCB) does not warrant its accuracy or reliability. The
contents of this report may be subject to change without notice. Final investment decisions should be made based on your own judgment.
Furthermore, this report’s copyright belongs to MHCB, and this report may not be cited or reproduced without the consent of MHCB,
regardless of the purpose.

This document is a translation of a Japanese original.

53